Energy > 9. Department of Energy Contractor Support Costs

The Department of Energy should assess whether further opportunities could be taken to streamline support functions, estimated to cost over $5 billion, at its contractor-managed laboratory and nuclear production and testing sites, in light of contractors historically fragmented approach to providing these functions.

Why This Area Is Important

The Department of Energy (Energy) spends 90 percent of its annual budgetwhich totaled $27 billion for fiscal year 2011on the contractors that carry out its diverse missions and operate its sites nationwide. These management and operating contractorswhich include corporations, universities, and othersalso provide sites support functions such as procuring needed goods and services; recruiting and hiring workers; managing health and retirement benefits; and maintaining facilities and infrastructure. GAO reviewed support functions at the 7 national laboratory and nuclear production and testing sites overseen by the National Nuclear Security Administration (NNSA)[1] and the 10 national laboratories overseen by the Office of Science. The total annual cost of support functions at NNSA and Office of Science sites increased from about $5.0 billion in fiscal year 2007 to about $5.5 billion (nominal) in fiscal year 2009.[2] Previously, GAO has recommended that Energy take actions to manage cost growth in certain support functions and related costs. Since that time, however, some of these costs have continued to grow.

[1]Congress created NNSA as a semi-autonomous agency within the Department of Energy in 1999 (Title 32 of the National Defense Authorization Act for Fiscal Year 2000, Pub. L. No. 106-65, § 3201 et seq.).

[2]Over the same period, the sites total annual support function costs increased from about $5.0 billion to about $5.3 billion in constant 2007 dollars. As discussed in GAOs January 2012 report, Energy sites support costs for more recent years are not fully known, because Energy changed its data collection approach in 2010 to improve the quality of its cost data. Also, Energy has not yet fully implemented a quality control process for these more recent data but intends to do so in fiscal year 2012.

What GAO Found

Because each site has historically had its own unique contractoras part of Energys longstanding model for research and nuclear weapons productionthe sites have also differed in how support functions are organized and carried out. This decentralized, or fragmented, approach has sometimes led to inefficiencies in support functions. For example, sites have long procured goods and services independently of each other, sometimes buying from the same vendors in an uncoordinated manner and limiting Energys ability to leverage sites buying power. Similarly, Energys fragmented approach to prioritizing and funding upgrades to sites aging facilities and infrastructures has made it difficult to leverage the resources needed to modernize its facilities. For example, some facilities cannot support vibration-free environments or other requirements of modern research tools.

As GAO reported in January 2012, Energy and contractors at its 17 NNSA and Office of Science sites have been carrying out a variety of efforts, since 2007, to streamline and reduce the costs of sites support functions. For example:

In 2007, NNSA began operating a central Supply Chain Management Center to reduce fragmentation in procurement and better leverage purchasing power across its seven sites. This center applies strategic sourcing techniques, aggregating and analyzing NNSA sites procurement spending data to identify opportunities to coordinate sites purchases and negotiate better prices for goods and services. One such analysis revealed that the sites were purchasing most of their laboratory supplies and equipment from the same set of 38 vendors through individual contracts negotiated by each site. The center was able to negotiate a single contract for all the sites, saving an estimated $22 million, or 17 percent, over the contracts 3-year term, according to a center official.

Also that year, the Office of Science adopted a less fragmented approach to upgrading facilities and infrastructure at its 10 national laboratories by using a centrally managed process to prioritize funding for modernizing the sites facilities. According to Office of Science officials, this approach has helped tie modernization efforts more closely to mission needs, while lowering the costs and shortening the lead times for upgrading facilities at sites.

In addition, GAO found that contractors at sites have undertaken their own streamlining and cost-reduction efforts, ranging from automating hiring, training, or other human resources activities to reducing employee health care and pension costs. As GAO reported in September 2011, while not all site-led efforts were aimed at reducing inefficiencies of Energys fragmented approach, some of the efforts appeared to incorporate key practices for streamlining and improving the efficiency of federal programs and functions identified.

While these efforts have been made, there are additional opportunities to streamline support functions. For example:

In an August 2010 memorandum, the Deputy Secretary of Energy called for expanding Energys use of strategic sourcing and cited NNSAs Supply Chain Management Center, with its centralized approach to procuring goods and services for NNSA sites, as a possible model for leveraging Energys and sites buying power.

NNSA is considering whether to consolidate certain support services, such as payroll and finance, at all seven NNSA sites. In a March 2011 white paper, NNSA concluded that a centralized approach was technically feasible and could lead to cost savings.

In a July 2011 draft solicitation to industry, Energy and NNSA proposed having a single contractor manage and operate two NNSA sites. Energy and NNSA estimated that the new approach would save around $895 million (nominal) over the next 10 years, largely through efficiency gains and other improvements to the sites business systems and support functions.

Energy and contractor officials noted that further assessment of the appropriateness of these and other potential efforts is warranted, as each can present challenges. For example, in response to the Deputy Secretarys August 2010 memo, the Office of Science expressed reluctance to implement a more centralized approach to procurement, citing the efficiencies of its current approach. Others in Energy noted, however, that similar concerns were expressed during prior streamlining efforts, including NNSAs own implementation of a centralized approach, and can be addressed through further assessment. In addition, a centralized approach may not always be more efficient or effective, but that determination can benefit from further assessment. For example, as GAO reported in September 2011, the anticipated cost savings from NNSAs proposal to consolidate management and operating contracts for two of its sites were uncertain, and NNSAs own analysis suggested that efficiencies could instead be achieved under its existing contracts through improved management practices.

Actions Needed

Energy and contractors at NNSA and Office of Science sites have taken steps, and are identifying further opportunities, to streamline support functions and reduce costs. As fiscal environments become more constrained, Energy needs to ensure that streamlining efforts will be effective. This includes understanding when it is appropriate to use a more centralized approach and addressing any challenges to further streamlining. As a result, GAO recommended in January 2012 that the Secretary of Energy should

assess whether all appropriate efforts are being taken to streamline support functions at NNSA and Office of Science sites and to address implementation challenges.

How GAO Conducted Its Work

The information in this analysis is based primarily on findings from the products listed in the related GAO products section. GAO reviewed documents and data and spoke with Energy, NNSA, and Office of Science officials and with contractors at eight sitesthe four largest sites by budget from NNSA and Office of Science.

Agency Comments & GAO Contact

GAO provided a draft of its January 2012 report to Energy for review and comment. Energy generally agreed with the findings and recommendations from the report, and had no further comments. As part of its routine audit work, GAO will track the extent to which progress has been made to address the identified action and report to Congress.

For additional information about this area, contact Gene Aloise at (202) 512-3841 or aloisee@gao.gov.